What is a conventional loan?

A conventional loan is defined as a mortgage that is not backed or insured by any government agency. This distinguishes it from government-insured loans, such as FHA or VA loans, which are designed to encourage homeownership among specific groups of borrowers. Conventional loans typically adhere to guidelines set by Fannie Mae and Freddie Mac, two government-sponsored enterprises that provide liquidity in the mortgage market.

Because conventional loans are not federally insured, they may have stricter credit score and underwriting requirements compared to government-backed loans. Borrowers may also face higher interest rates if they do not meet these criteria. This non-reliance on government insurance allows for more flexibility in loan structuring, which can include a variety of terms and conditions based on the lender's policies.